ISLAMABAD: Without reviving its 'suspended' standby arrangement programme, the government has told the International Monetary Fund (IMF) that it will increase electricity tariff by 2 per cent and reduce fiscal deficit through tougher controls on expenditure and additional tax measures to avoid a formal severing of relations with the lending agency.

The 11-day inconclusive talks between the government and an IMF mission witnessed a lot of ups and downs as the authorities struggled to convince the agency to stay engaged with Pakistan despite failure to introduce economic reforms and come up with clear decision to implement taxation measures, including 15-per cent flood surcharge on income tax.

Both sides said the talks were constructive but the IMF mission expressed concerns over rising debt, higher government borrowing and quasi-fiscal operations (subsidies) and unveiled a 'wish-list' that must be adhered to by the authorities during the remaining period of the current fiscal year. It also asked the authorities to have 'binding agreements' with provincial governments to control their expenditures and fiscal deficits.

The two sides finalised monthly benchmarks for deficit control, tax measures and other policy decisions for possible review in May. The government would inform the IMF about its final plan for introducing flood tax and increase in special excise duty over the next couple of days, because of a 'multiple approval process', a government official said. The legislation to introduce these two taxes has already been submitted to the parliament for approval.

The IMF put Pakistan's $11.3 billion standby arrangement in a 'technical suspension' in May last year after disbursing about $7.6 billion. A top finance ministry official told reporters that Pakistan would continue to have Article-4 consultation with the IMF, indicating that remaining disbursements of up to $3.7 billion would not be possible in the immediate future.

Another official, however, said that application of article-4 consultation with IMF meant an advisory role for the agency with regular exchange of economic data even without a 'regular assistance programme'.

He said the two sides had agreed to a revised fiscal deficit target of 5.3 per cent for the current year but that would depend on successful passage of law by the parliament to introduce 15-per cent flood surcharge on income tax and increase in duty rates on imports.

The two sides also discussed the next year's budget and the IMF insisted on introduction of RGST with effect from next year to provide a sustainable basis for the year's fiscal framework.

A top finance ministry official said the IMF team left the country after positive discussions but talks were not concluded and issues would continue to be discussed as the delegation reached Washington.

He said the two sides agreed to reduce inflation and government borrowing and the fiscal deficit would be reduced to a manageable limit through tight controls over expenditures and revenue measures. The government would start implementing measures from Saturday to resolve the circular debt issue in a speedy manner.

After the talks, head of the IMF mission Adnan Mazarei said the two sides discussed recent developments, the economic outlook for the rest of the fiscal year and the next year and economic policies needed to restore macroeconomic stability in the context of the improved external current account and international reserves. “We also discussed structural reforms to strengthen public finances and the financial sector.”

In a statement, he said: “Discussions on economic stabilisation focused on addressing inflation, containing the budget deficit, reviving growth, and meeting the challenge posed by higher international oil prices. There was agreement on the need to reduce the budget deficit in the current financial year.

“The mission welcomed the recent expenditure restraint and tax policy and enforcement measures being considered by the government to mobilise additional revenue.”

The mission said it expected prompt implementation of tax measures, saying if implemented promptly and consistently, the measures would help improve the budgetary position.

The mission welcomed the government's efforts to lower recourse to State Bank of Pakistan borrowing since late-December.

“Looking ahead, significant fiscal consolidation will be needed in 2011/12 in order to reduce inflation and ensure debt sustainability. The lower budget deficit would also help manage the impact of higher oil prices on the economy,” the IMF statement concluded.